From Traderpedia

This indicator gives the pivot point level together with two levels of support and two levels of resistance based on the previous days Open, Close, High and Low prices.

The pivot point level itself will act as a level of support/resistance andusually the largest price movments will occur around this level. The other support and resistance levels are just that and can slow down a movement in a stock/index or encourage it to bounce/retrace at that level.

Pivot points are set at the beginning of the days trading and based on the previous days action. Therefore they are good short-term indicators and can be used to define a trend in the market or for entry and exit points for a trade.

Pivot points are a useful indicator but are most effective when used with other forms of Technical Analysis such as candlestick patterns, MACD crossovers or RSI levels.

[edit] Calculation

Pivot points and the Levels of support and Resistance are relatively easy to calculate. All that is required is the Open, Close, High and Low of the previous days trading.

Pivot point (P) = (yesterdays high + yesterdays low + yesterdays close)/3

Resistance Level 2 (R2) = P + (yesterdays high - yesterdays low)

Resistance Level 1 (R1) = 2*P - yesterdays low

Support Level 1 (S1) = 2*P - yesterdays high

Support Level 2 (S2) = P - (yesterdays high - yesterdays low)